When Will Washington Finally Pass Tax Reform?

Since last year's election campaign began, a consistent chorus from politicians has been the need for tax reform. While Republicans and Democrats will disagree on the details, the overall notion is popular. Now, with control of both houses of Congress and the White House, it would seem that Republicans could move a plan of their choosing with little problem.

Not so fast!

While lowering tax rates for individuals and businesses will be the central theme of tax legislation rolled out imminently, the timing for consideration and passage of this legislation continues to slip. The latest estimates put passage in the August to October timeframe, which then brings into question whether that legislation can be made retroactive to the beginning of 2017—or whether it even passes before 2018.

So what is the hold up?

Well, first there are a number of other expensive campaign promises to be kept—a defense build-up, an infrastructure plan, a border wall. Then, there is the promise to repeal and replace the Affordable Care Act (ACA). Further, there is a looming, near-term fight coming over increasing the national debt ceiling, and finally, there are numerous national controversies that seem to daily distract from the business of governing.

And, the King Kong of reasons: How do we pay for any of this???

Now, early on, House Republicans thought that they had a pretty good solution, or at least a partial solution. It was called the border adjustment tax. In effect, this idea would have broadly excluded U.S. exports from U.S. taxation, while fully taxing all imports. Because we import much more than we export, this new tax regime was projected to be a net trillion dollar winner to the Treasury, while the exclusion of exports from taxation would stimulate more business and job creation here at home, thus generating further U.S. tax revenues.

But, the problems turn out to be many. First, businesses that import into the U.S. hate it, and many of them are large U.S. employers. Second, there is a good argument to be made that such a tax plan would merely serve as a tax shift to lower and middle class consumers who would pay increased prices for imported, but necessary, products, while reducing tax rates for the wealthy. Third, the politics in a closely-divided Senate make this idea from the House tricky to pass, especially with no expected Democratic support.

That means the border adjustment tax is on life support, and Congress and the White House may need more time to develop alternate plans to pay for their promises, including tax reform.

A tax plan will still pass because, politically, it has to. However, depending upon how difficult the ACA repeal and replace effort becomes, the timing of ultimate passage—and magnitude of tax cuts—becomes harder to predict, short of just punting on payment and adding to the deficit and national debt.

As substantive details emerge, we will provide timely updates and planning ideas for you, our clients and friends.

In the interim, don't miss Kong: Skull Island playing at a theater near you, and also under the dome of the United States Capitol.

 

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Topics: Tax Reform

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